CELSIUS’ leadership believes the company’s new distribution partnership with PepsiCo will help increase its distribution footprint by around 40% over the next 12 months as the Florida-based energy drink brand eyes new channels and global growth.
This morning, CELSIUS announced it has entered a long-term distribution partnership with PepsiCo, which will serve as the exclusive distributor for the brand in all U.S. channels – with some exceptions, including New York’s Big Geyser – and be the preferred global distribution partner.
Speaking with investors and analysts on a conference call this afternoon, CELSIUS CEO John Fieldly and CFO Jarrod Langhans said the transition onto blue trucks will take place over the next 90 to 120 days, with the brand expected to be fully onboarded by 2023. PepsiCo will also help CELSIUS launch in additional global markets, including Canada, Germany and the U.K., within the next two to four years.
“The agreements provide a transformational opportunity to gain immediate scale and accelerate market share by securing [an] additional best-in-class North America distribution network and global reach as well as providing the funds necessary to take CELSIUS to the next level,” Fieldly said. “The distribution provides additional access to new consumers and usage occasions. Through diverse channel exposures and expansion foodservice independent convenience including PepsiCo has medallions program, expansion and vending college campuses concessions and expansion in the military.”
What is the Significance of PepsiCo’s Investment?
PepsiCo will receive an 8.5% ownership stake of CELSIUS in the form of convertible preferred stock. The conglomerate will also gain a seat on the brand’s board of directors, increased the board size from eight to nine.
According to Langhans, PepsiCo will have the option to increase its stake in the future.
“There’s nothing restricting them from ever coming in and having a deeper conversation with us in terms of [investing] even more,” Langhans said. “But there is the ability for them to add to that, not necessarily in a preferred nature, but they have the opportunity to add to that. Now, if they want to come and talk more about [becoming] preferred, then they’re welcome to do that as well. But from that perspective I don’t think there’s any deep restrictions to prevent them from taking a bigger stake over time.”
Fieldly said the equity investment will go towards working capital and growth investments and the funds will be put towards a number of initiatives including innovation, expanding in-store coolers, fleet expansion, working capital and potential M&A activity (more on that below).
Langhans noted that the investment from PepsiCo will also allow CELSIUS to streamline its supply chain and enter the company’s existing in-store coolers. He added that the company intends to use the funds strategically in order to “have firepower going forward” and that it intends to deploy the capital over a matter of years – not months.
“Unlike many of our competitors, we will also gain access to thousands of existing coolers – If it’s cold, it’s sold,” Langhans said. “We will benefit from portfolio optimization through this strategic alliance with a global leader in beverages as we add a rapidly growing healthy lifestyle energy brands to PepsiCo’s existing energy portfolio, and we will benefit from PepsiCo’s vast experience and resources as a global beverage leader while retaining our entrepreneurial identity and agility.”
Beyond growing its current portfolio, one additional opportunity the new funding opens up is M&A. When asked on the call, Fieldly said there are no immediate announcements regarding acquisitions, but the company is open to potential purchases in the future.
“As we go forward, [the investment] allows us to be nimble, we are extremely focused on our core portfolio with CELSIUS taking it broader and wider and taking advantage of this partnership. But M&A is not out of the question on a go-forward basis as we look over the horizon,” he said.
What About CELSIUS’ Current DSD Partners?
Before taking full advantage of the new partnerships, CELSIUS will first need to transition from its existing DSD network of nearly 300 partners to the PepsiCo system, which is expected to primarily take place throughout the third and fourth quarters of 2022.
According to Fieldly, PepsiCo has agreed to assist beyond its initial $550 million investment to help cover termination fees with DSD partners and he said the ultimate cost to the company will be neutral on a cash basis, with further financial details about the transition expect to be included in its Q3 earnings report later this year.
Fieldly acknowledged that the shift into the new system will be difficult and that “in the past brands have struggled” with similar disruptions, but he said CELSIUS has created a “road map” with PepsiCo to oversee the process.
A rough transition in large part contributed to the fast decline of PepsiCo’s previous energy distribution deal with Bang in 2020, as the brand saw triple-digit sales growth turn into steady declines while moving out of Anheuser-Busch InBev (A-B) distribution houses. When asked about lessons CELSIUS and PepsiCo have taken away from the ill-fated Bang partnership, Fieldly was brief, only suggesting that operational challenges and product availability were factors in the rough transition.
Langhans noted that the new funding will immediately go towards increasing inventory.
For the brand’s existing DSD partners however, the announcement is not without some irony. In 2020, after Bang began moving onto Pepsi trucks, A-B distributors were left with a void in their energy portfolios and many turned to CELSIUS. In May 2021, Fieldly told BevNET that CELSIUS had capitalized on the vacuum and the bulk of its DSD network were A-B houses. Speaking on the call today he thanked those partners for helping to drive the velocity that has resulted in the brand’s current growth wave.
“When you look at the last 18 to 24 months, it’s been really exciting to seeing some of these distribution houses really [drive] velocity and start to see the value of CELSIUS, which we worked hard to create.”
But with a new hole in their portfolios, distributors have a number of fast-rising options to choose from, including the AB-backed Ghost, Nutrabolt’s C4, and a back-on-the-market Bang, which has already begun onboarding several A-B distributors since leaving Pepsi’s system in June.
What Does the Deal Mean for Pepsi?
The partnership gives PepsiCo a rebooted stake in the fast growing fitness and performance energy sector, as well as providing a different option in its existing energy portfolio, which is currently made up of Rockstar, MTN Dew and Starbucks products.
Goldman Sachs Equity Research was positive on the agreement, but noted that in the short term CELSIUS’ relatively small size will likely result in only “modest” topline growth for PepsiCo Beverages North America.
Longer term, however, Goldman noted that CELSIUS’ “robust topline momentum and exposure to the highly attractive fitness/performance segment of the energy drink category” will be a benefit for the conglomerate and that the brand helps create “a more formidable moat” for PepsiCo in the energy drink category. As well, the report cited potential margin expansion opportunities, “given the agreement allows [PepsiCo] to purchase finished goods from [CELSIUS], and sell them at a marked-up price, thereby earning an incremental distribution fee on the products.”